Cemtrex Inc.

Greetings, and welcome to the CEMTREX fourth quarter and full fiscal year 2023 financial results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates, or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment, on what the future holds. They are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these four looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these four looking statements in light of new information of future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading risk factors. A press release detailing these results was issued on December 21st and is available in the Investor Relations section of our company's website, semtrex.com. Your hosts today, Sagar Gawal, Chief Executive Officer, and Paul Wyckoff, Chief Financial Officer, will present unaudited results of operations for the fourth quarter and full fiscal year, and it's at September 30th, 2023. At this time, I'll turn the call over to CEMTREC's Chief Executive Officer, Sagar Gold. Thank you, operator.

And good afternoon, everyone. I'm pleased to welcome you to today's fourth quarter and full fiscal year 2023 financial results conference call. The fourth quarter of fiscal year 2023 was highlighted by a third consecutive quarter of operating profit driven by the company's realignment and operating performance improvement. For the full year, Sumtricks had revenue of $59.7 million, an increase of 33%. In combination with operational improvement, the full year also led to a gross margin improvement of 680 basis points to 44%. We continue to expect increases in our gross margin going forward over time as we make further enhancements in our businesses. Overall, fourth quarter operating income was positive for the third quarter in a row at 0.2 million compared to an operating loss of 3.1 million a year ago. We also believe that there is room within our inventory and asset base to draw extra liquidity in order to continue to maintain a healthy cash position. Revenues in our security segment were led by ViCon, with full-year revenues improving 46% to $34.7 million, exceeding our earlier expectations of $28 million for fiscal year 23. Revenue was driven by orders from border protection, corrections facilities, and other customers for our award-winning Roughneck cameras and Valeris video management software solutions. Vicon orders included a large correctional facility and current end customer that upgraded its security technology system with the new Valera software and hardware with a $1.5 million order. Increasing modernization of the current security infrastructure is accelerating the growth of the border security market, driven by the rise of geopolitical instabilities and an increase in border threat assessment. As customers seek to modernize their current security infrastructure, Vicon continues to stand out with its advanced technologies and products. Recently, Vicon launched a new cloud security platform called Anavio that integrates video, access, and intercom into one easy-to-use system powered by AI and face-based authentication. This new cloud platform allows us to create more value in our business over time by evolving Vicon into a recurring revenue business model. Additionally, with AI at the core of our roadmap in Anavio, we're excited to layer new capabilities and benefits for our customers to deliver the most cutting-edge security solutions over the months and years to come. With the launch of Anavio, along with continued improvements to our core software platform, Valeris, we expect to drive further growth and see additional opportunity to grow gross margin percent in 2024. Revenue for our industrial services segment, AIS, increased 18% during the full year to $25 million, exceeding our original target of $21.8 million for fiscal year 2023 and up from $21.2 million in 2022. The increase was mainly due to increased demand for our services and supported by the close of our highly synergistic acquisition of Hy-Z Mechanical. Based in Columbia, Pennsylvania, Hy-Z is focused on steel fabrication and contracting, primarily to the commercial and industrial water treatment industry, as well as other service industries. Hy-Z provides the water treatment industry with a variety of fabricated vessels and equipment, including ASME pressure vessels, heat exchangers, mixed tanks, reactors, and other specialized fabricated equipment. With the acquisition enabling AIF to expand into new markets, including government and industrial verticals, During the quarter, AIS received a $1 million order for the Pennsylvania Stewartstown Borough Authority's Stewartstown Wastewater Treatment Sludge Dewatering Improvements Project. The acquisition brings over approximately $11 million in immediately accretive annual revenue and approximately $775,000 in adjusted EBITDA when averaged over the last four years. With its client list of commercial and industrial facilities, a seasoned team, and extensive manufacturing equipment. The transaction was accretive in the fourth quarter of fiscal year 2023. Along with the business purchase, the company also acquired the real estate the business occupies in Columbia, Pennsylvania. The gross profit margin for AIS improved to 34% for the year compared to 30% for the year prior, driven by increased prices and lower subcontractor costs. I'll now turn the call over to Paul Wyckoff, CFO, to discuss financials. Paul?

Thank you, Sagar. Revenue for the full year of 2023 totaled $59.7 million compared to revenue of $45 million for the full year of 2022, a 33% increase year over year. Revenues for the fourth quarter of 2023 were $16.9 million compared to $11.8 million for the fourth quarter of 2022, an increase of 44%. The increase in revenue for the year was due to increased demand for our company's products and services. The security segment revenues for the years ended September 30, 2023 and 2022 were $34.7 million and $23.8 million, respectively, an increase of 46%. The increase was due to an increased demand for security technology products under the Vicon brand, Industrial services segments revenues for the full year of 2023 increased by 18% to $25 million, primarily due to the increase in demand for its products and services and the additional revenue from the business related to the acquisition of Heise Mechanical. Gross profit for the full year of 2023 was $26 million, or 44% of revenues compared to gross profit of $16.6 million, or 37% of revenues, for the same period a year ago, mainly attributed to increased demand for products and services, along with increased prices and lower subcontractor costs. Fourth quarter gross profits of $7.2 million increased 58% from $4.5 million in the prior years quarter, fourth quarter. Total operating expenses for 2023 were 27.3 million, of which 6.9 million were incurred in the fourth quarter. Total operating expenses for 2022 were 30.7 million. The decrease in total operating expenses was primarily driven by decreases in depreciation, legal and accounting fees, and research and development expenses related to the security segments development of proprietary technology and next generation solutions associated with security and surveillance system software. Operating loss for the full year of 2023 improved to 1.3 million as compared to an operating loss of 14.1 million for the full year of 2022. due to increased revenues, increased gross profit, and reduced operating expenses. Operating income for the fourth quarter of 2023 was $0.2 million as compared to an operating loss of $3.1 million for the fourth quarter of 2022. The increase was primarily due to an increase in gross profit for the period. Operating activities used $2.3 million worth of cash for the year ended September 30th, 2023, compared to using $16.1 million for the year ended September 30th, 2022. Net loss for the full year of 2023 was $9.3 million as compared to a net loss of $13.3 million in 2022. Net loss in the fourth quarter of 2023 totaled $1.2 million compared to a net income of $0.09 million for the fourth quarter of 2022. Cash and cash equivalents and restricted cash totaled $6.3 million at September 30th, 2023 as compared to $11.5 million at September 30th, 2022. Inventories increased to $8.7 million at September 30, 2023, from $8.5 million at September 30, 2022. I will now turn the call back to Sagar for a review of our 2024 outlook. Thank you, Paul.

Looking ahead, we are highly focused on delivering larger operating profits by driving top-line growth while maintaining tight cost control measures in our two operating businesses. Vicon has the ability to disrupt the status quo of how the security industry traditionally operates with its Navio next-generation version of state-of-the-art surveillance cameras and VMS software. Additionally, we see continued opportunity for organic growth and subsequent built-on acquisitions at AIS that will drive attractive returns going forward for us. After achieving operating profit consecutively for three quarters, we are committed to achieving positive operating income in fiscal year 2024 on a full year basis. In 2023, we demonstrated our commitment and focus to delivering attractive operating results, and we are confident that as we stay on this path, we can deliver strong long-term value for our shareholders going forward. Thank you all for attending this call, and now I would like to answer your questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And one moment, please. And our first question comes from the line of Larry Holub with Holub Family Office.

Please proceed with your questions. Congratulations on another great quarter. A couple of questions if you have time. First one is, can you talk more about any traction you're seeing already with Anavio?

Sure. So, you know, we just started getting that product out into the field, and we're starting to get some early pilot projects with that. It's a new product, so it's going to take a little bit of time to really explain it and get some of these systems stood up. But we're already getting interest in the product, and we're going to start ramping that up into 2024. So with any new product, it's just a little bit of a learning curve for folks, and we have to mobilize the whole organization to really ramp up these efforts. But the interest is certainly there, and I think we're going to really start to hit some solid momentum into 2024.

Great, thanks. And the second question is, can you provide any additional updates to the anticipated Vicon growth beyond what you've already messaged?

Yeah, listen, you know, I think generally speaking, the demand for Vicon products is growing. You know, we have a great products and services from our cameras to, you know, the current Valeris offering and as well as with an audio. You know, I think in terms of our core offering, that's generating more and more interest in the organization's products. And so, and especially many of our core customers are getting more and more interested in improving and updating their security systems and leveraging the latest and greatest technology. So we are seeing demand sort of pull through from that. And I think generally speaking, just, globally, the demand for security solutions is just increasing naturally, just because of the world that we're living in today with wars and crime and so forth. So I think from a macro perspective, we have a tailwind. And then in terms of what we're doing, sort of at the micro level within our own company, we're able to drive growth, right. And so, and I think, you know, in terms of our product roadmap, too, we have a lot of exciting things look to look forward to. So you know, in audio in terms of what it exists today is really just the first incarnation. And we have more features, you know, as far as AI that we're looking to do, we have some exciting new hardware that we're going to be launching next year too. So, you know, we're constantly, uh, putting out new products into the market and we have an exciting product roadmap. And I think everything we're doing is kind of layering on top of each other. This is, um, this is not the kind of industry where you come out with, um, you know, some hot sexy product and you, you conquer the world, you know, basically. You know, Vicon has been around for 55 years, and we want to steadily continue to build on the legacy that we've established in the market. And that just comes from continuing to serve our customers well, continuing to deliver exciting new products that improve their overall security environment and so forth. So I think we're doing that, and we're steadily just gaining more and more momentum each year as we continue to execute.

Great. And then any new markets that you're thinking about entering, leveraging, and utilizing AI? Sorry, could you just repeat that question?

I got it.

Can you talk about any new markets that you're considering entering with, you know, leveraging and utilization of artificial intelligence?

You mean outside of ICON's core markets? Yeah. You mean outside?

Or even within, right, if there's a new channel or segment. Because, I mean, I guess to the point, I did see yesterday's Glarus news, right, the integration of BMS into Unalert's AI visual gun detection system. So, you know, kind of thinking along that lines and how maybe those kinds of things position you for an expanded reach, for example, into the municipal and government security segments.

Yeah, so I think in terms of, you know, how we think about AI, yeah, I mean, this could be a long answered question, but I'll do my best. So, you know, basically, you know, we want to, the way we see our growth in this industry is by focusing on delivering value to customers who are willing to pay more for better and better security solutions. So what I mean by that is, you know, if you think about you know, organizations that require a better and better security, um, and they're willing to pay for it. You know, those are organizations like hospitals, like, uh, you know, university schools and so forth. Right. So, um, you know, we really focus on sort of the, that part of the market, you know, where they need a professional grade solution or an enterprise grade solution. And, um, and so there's a number of verticals in that those markets that we serve already quite well in terms of corrections, border protection, Um, you know, we obviously do a number of schools, um, uh, healthcare as well. Uh, and really for us, it's not necessarily about, um, expanding outside of that, but it's about building better and better solutions so that we can take more and more market share within those areas where there's a high willingness to pay, because we think that, you know, ultimately it's about growing, um, the solution sales and for. And for all the solution sales that we make, we sell more and more software, right? And ultimately, the more software we sell, the more stickiness there is with their customers and the more we can grow our gross margin. And so that's really the sort of North Star in terms of how we think about success in this market and what sort of drives how we think about it. So we wouldn't want to use AI to go capture a part of the market where there isn't a lot of willingness to pay for that incremental innovation, right? So, you know, if that's helpful.

Okay. No, very helpful. Thank you very much for your time. Appreciate it. Sure.

Our next question comes from the line of Alan Rosenthal with Scarlet Knight Capital. Please proceed with your question.

Hi. Great quarter. Thank you for taking my questions. I have two. Can you discuss the The geographic composition really of the Vicon business that's growing so rapidly right now. How much is domestic here in the United States? How much is foreign? And then a little add on to that. And also, you know, kind of where you see the growth, you know, in each, whether it's, you know, outside the USA versus inside.

Yeah, sure. Happy to talk about that. So, you know, as you think about this past fiscal year, I would say, most of the growth came domestically. I would say it's probably 85, 90% U.S. or domestic. I'd say probably 85 and 15% international out of that 34 million. Again, that's just me off the cuff here. But I think what's interesting really about this moment in time is that So in the United States, there's enormous growth in terms of the need for security for organizations that hadn't been as serious about it before. So schools, for instance, right? Religious institutions, churches, synagogues. So they are now all spending more money than they ever had to because of just the nature of the world we live in today. And so we are seeing growth here, right? And then obviously the innovation is driving you know, the adoption of new technologies, AI, and so forth. So I think that's going to be the growth driver here in the US. Internationally, it's a little bit of a different story. And what's really driving that there is just the growing middle class and the growing economies around the world, whether it's Saudi Arabia, whether it's India, Indonesia, Malaysia, and some of these economies that are starting to boom and have extremely high growth. And so in those economies, you're seeing a more widespread deployment of security solutions because they're building so much infrastructure like train stations, like police stations, schools, hospitals. And so as these economies are building all of that, there's going to be massive, massive opportunity for growth there as well. I'd say we're excited about both markets. I certainly don't want to downplay the opportunity for us in the U.S. because I think it's extremely promising. But I think some of the growth in some of these emerging markets can also be pretty fantastic as well for us. So frankly, we're focused on both. But as I may have mentioned on prior calls, I think there's opportunities to to make it maybe a 50-50 split over time in terms of the amount of business we're doing internationally versus domestically. And so we're definitely focused on growing long-term in international markets.

That's excellent. It just actually made me think of another question here. What's the average – when you get a new contract here and so on, could you discuss kind of like what's the average – I guess, sale that you make. And if you see that number improving and kind of how that works, you know what I'm saying? Like, so your average selling price, you know, on a solution, for example, you know, kind of describe how that works and if you've seen that number increase and, you know, what your expectation is. Because obviously, you know, as you said, demand is surging here. So, you know, what are you seeing in terms of pricing?

Yeah, you know, I think giving you some rough math, I can tell you that, you know, a couple of years ago, you know, our average order size was probably around 50,000. And I can tell you that, you know, this past year, that number was closer to 100,000, maybe even a little bit over. So I think there's just a natural growth in terms of the kinds of projects we're doing in terms of size. And, you know, we're hopeful and optimistic that that number will continue to grow. Right. And so, But then there's also, you know, there's a lot of, like if we sell, let's say a hundred thousand system over the next couple of years, we may sell a lot of smaller orders to continue to expand that system and support that customer. Maybe they expand the building or something like that. Maybe they want to add more cameras. So, you know, so we do certainly benefit from some of that residual revenue. But, but I think in general, we are a systems solutions company. We sell generally on projects. And so I think the idea is that we want to, increasing the size of the number of orders, you know, the size of the order, the average order that we're getting in the organization.

That's great. That's great. One last question. I think the only overhang here is probably the piece of debt that you got hanging out there with Chicago Ventures. You know, I know we've discussed it in the past, but you've got positive cash flow right now. Can you just kind of give an overview of kind of the way you view, you know, how you want to handle that? Because I think once that's handled, you know, the sky's your limit. And I'll just, I'm going to hang up right now. So, I mean, I'm listening.

Yeah, sure. No, I appreciate the question.

Yeah.

Listen, you know, I think, you know, we were, you know, we do have that debt outstanding. You know, we've been fortunate to have a really fantastic relationship with them and they've worked with us to extend that over time. And, you know, they've been very supportive of us as we continue to improve our business. So ultimately, I mean, I think there's, you know, Ideally, we continue to grow the business so that we can pay that down over time and get to a place. We've had three quarters of operating profit. I hope that as we continue to improve, then we'll be in a position to start to reduce that debt over time and continue to work with them as best as possible to satisfy that debt. You know, I think as our business improves, I think we'll be in a better and better position to deal with that. So, you know, we've been, you know, we were able to get that extended and, you know, so we'll continue to work through that. And, you know, I think as the business improves, it's only going to get easier and easier for us to manage that.

Great job. Happy holidays to you and wishing you a fabulous 2024. Thank you.

Thanks, Alan. Thank you. And we have reached the end of our question and answer session. I would now like to turn the call back over to Mr. Govel for closing remarks.

Thank you, Operator. I would like to thank each of you for joining our earnings conference poll today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please feel free to reach out to our IR firm, MZ Group. We'd be more than happy to assist. Thank you, everyone. Happy holidays.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.